Fighting Foreclosed Home Blight

Calculated Risk has a post here detailing efforts some cities are making to force lenders to maintain the vacant homes they’ve foreclosed.

Apart from the obvious fact that blight upsets constituents, attacking blight aggressively is good policy because it helps maintain values (and tax bases). I came to this view via Wesley Skogan’s Disorder and Decline and George Kelling’s Fixing Broken Windows, both of which should be required reading for real estate investors, appraisers, and lenders. The latest research provides additional support for the idea that disorder leads more disorder, creating a self-reinforcing downward spiral.

Although Detroit’s economic problems are severe, I wonder if it would have made a difference if funds had been available in the past to keep the place cleaned up.

Everyone Picks on Detroit

As usual, Detroit once again has suffered the largest population decline and net outmigration of major metropolitan areas on both an absolute and percentage basis (Census data released March 19 here). Mark Perry’s Carpe Diem post, “Supply and Demand in Action,” displays the image below:

 

But the larger story is the continuing depopulation of rural counties in states like Arkansas, New Mexico, and Oklahoma. Here’s the list of counties with the greatest percentage net outmigration in 2008:

Interesting that no Michigan counties made the top 20. I’ve previously posted on the “natural amenity” explanation for why places like this are depopulating.

CMBS Loan Deterioration

Via Zero Hedge, Deal Junkie, and Calculated Risk, Moody’s is in the process of reviewing more than $300B in outstanding CMBS debt (more than half of all outstanding CMBS) with downgrades inevitable.

Separately, the MBA’s Commercial/Multifamily Newslink summarizes a REIS forecast that CMBS defaults for loans made in 2006-07 will in excess of 12%. Some markets will be hit particularly hard:

Reis expects this year's default rates to reach 20.8 percent in Sacramento, 18.4 percent in San Bernardino, Calif., 16.6 percent in Phoenix, 15.8 percent in Oakland, Calif. and 14.5 percent in Detroit.

It pays to be somewhat skeptical of forecasts, but the increase in loans now on servicer watch lists is alarming:

CMBS loans on servicer watch lists increased from 0.72 percent of total balance in January 2008 to 15.6 percent last month, and Reis said more than 20 percent of CMBS loans secured by office properties are on the watch list compared to 15.2 percent of all retail loans and 15 percent of all apartment loans.

I’ve previously posted on why income property loan performance tends to deteriorate rapidly, and why some vintage years are hit especially hard.

Which Markets Have Lost the Most Jobs?

Employment has suffered the most in Detroit (no big surprise there). However, there are some surprises in the other rankings, including which markets have held up the best.

A word on methodology. I looked at the highest employment level in each market since January, 2000, and compared it to the latest level. All data is from BLS Local Area Unemployment Statistics.

Here are the results:

Employment as of November, 2008	Peak Since 1/2000	Current	Change from Peak	% Change from Peak
Detroit	2,217,186	1,899,782	(317,404)	-14.32%
San Jose	962,408	845,417	(116,991)	-12.16%
San Francisco-Oakland	2,250,832	2,138,050	(112,782)	-5.01%
Chicago	4,721,131	4,542,407	(178,724)	-3.79%
Los Angeles	6,307,149	6,098,378	(208,771)	-3.31%
Riverside-San Bernadino	1,711,443	1,658,533	(52,910)	-3.09%
Atlanta	2,650,838	2,569,010	(81,828)	-3.09%
Washington DC	2,967,601	2,882,203	(85,398)	-2.88%
Miami	2,739,126	2,668,358	(70,768)	-2.58%
Orlando	1,070,271	1,048,644	(21,627)	-2.02%
Denver	1,346,897	1,323,378	(23,519)	-1.75%
San Diego	1,485,911	1,468,666	(17,245)	-1.16%
Sacramento	1,003,441	994,697	(8,744)	-0.87%
Dallas	3,023,034	3,005,173	(17,861)	-0.59%
San Antonio	906,335	902,089	(4,246)	-0.47%
Austin	831,555	829,083	(2,472)	-0.30%
Houston	2,680,121	2,675,806	(4,315)	-0.16%
Las Vegas	936,369	934,956	(1,413)	-0.15%
Phoenix	2,022,781	2,022,725	(56)	0.00%

Detroit employment peaked in June, 2000, and has lost jobs ever since. Here is a chart showing year over year job loss for this market:

(Click on charts to open larger versions in new windows)

The market with the second worse performance is San Jose. It, along with San Francisco (to a much lesser extent), has never fully recovered job losses sustained in the dotcom bust. Here is the year over year chart for San Jose:

The best performing markets are also something of a surprise: Las Vegas and Phoenix. Both of these markets have severely distressed housing markets, and the conventional wisdom is housing difficulties drag down employment. Here are the charts for these two markets:

Finally, let’s discuss Riverside-San Bernardino for a minute. There is no question this market is hurting – I’ve discussed it previously here and here. But, a Bloomberg story with Calculated Risk commentary suggests a parallel between Detroit and this market because both have the same high (9.5%) unemployment rate. I think it’s wrong to suggest Detroit’s situation, which has had sustained job losses for eight years totaling 14.3% of it’s peak employment base, is similar to Riverside-San Bernardino, which has only lost jobs for a little more than a year and is down a little more than 3% from it’s peak. I’ve previously argued unemployment is not a good measure of market distress, because it’s possible to have very high unemployment rates and still have positive employment growth.

You can download a free report which provides similar employment charts on many other markets here.

Is Overbuilding Responsible for Excess Housing Inventory?

The President of the National Association of Home Builders says “The excess housing inventory in today’s market is the result of unprecedented foreclosures, not overbuilding.” Paul Jackson, Housing Wire, suggests this statement “borders on the certifiably insane ." I may be certifiably insane, but I think the NAHB position is closer to the truth.

Obviously, we have excess inventory. The amount is subject to debate, but arguments can be made for between 1.75 to 4 million excess units (see this Calculated Risk post, for example). Obviously, many of the excess homes are newly completed builder inventory. You can read the story behind the pictured subdivision here.  So, in a sense builders are responsible for at least a portion of the excess inventory. They built it, it’s empty, end of story.

But, of course, it’s not that simple. There are a lot of people who are living in substandard housing, in apartments, with their parents, with roommates, etc. who would be delighted to be living in these “excess” units. The problem is much of the excess is located in places people don’t want to live or can’t find jobs (read, for example, these depressing posts about Detroit in The Big Picture and The Weekly Standard). And, much of the excess is not affordable even at today’s depressed prices to the people who want the units.

I think Miami is a good example of what actually occurred. Here is a chart of residential permits issued in Miami between 1999 and November, 2008:

(click on images to open larger versions in a new window)

On it’s own, this is about as clear a case as you can get of overbuilding – permits obviously spiked between 2004 and 2006, which nicely dovetails with the peak of the subprime craziness. But, consider employment growth in Miami during the same period:

At the same time permits were peaking at around 45K per year, Miami was adding jobs at 100K a year. Can you really say builders were overbuilding when there are twice as many people with new jobs as units being added to supply? If anything, the numbers imply a housing shortage in the peak period. Here is a chart showing the ratio between new jobs and residential permits:

From mid-2002 through 2007 Miami was adding more jobs than housing units, and for most of this period it was adding around two jobs for every new housing unit. This was not an overbuilt market during that period.

In contrast, here is an equivalent chart for Houston:

Housing prices have held up relatively well in Houston, and most people do not consider it to have been one of the bubble markets. But, note Miami had substantially more jobs added per new unit than Houston did during this period. The data suggest Houston was relatively overbuilt compared to Miami.

In fact, the data suggest that maybe part of the problem in the bubble markets was builders didn’t build fast enough to keep pace with the demand created by new jobs (you can see similar charts for Los Angeles, San Diego, Las Vegas, and many more markets here). I’m not ready to go so far as to suggest they should have done so – had lenders stuck to reasonable underwriting standards more of that demand would have shifted to the rental market and we would have seen higher rents and less vacancy in that segment, which I think we all agree in hindsight would have been better than putting people in houses they couldn’t afford.

What Markets Are in a Recession Now?

A couple of recent posts (Econbrowser "Is This a Recession?" and The Big Picture "A Perfect Recession Indicator" have observed a perfect correlation between year over year employment loss (i.e., fewer people are employed in April 2008 than in April 2007) and the subsequent identification of a recession for that time frame. No one publishes GDP figures for individual markets, but if we accept year over year employment loss as a proxy what markets are in a recession now?

Of the markets we track, the big loser is Detroit (probably no surprise there):
Detroit has been losing jobs every period since 2001. It's probably also not a surprise that Riverside-San Bernardino is losing jobs:

But, if you thought all markets with housing price woes are in recessions, you would be wrong. For example, not only is Las Vegas gaining jobs, it is doing so at an accelerating rate:

Here is the whole list:

Moderate to Strong Job Growth Trending Up: Austin, Chicago, Dallas, Denver, Houston, Las Vegas, San Antonio

Weak Job Growth and/or Trending Down: Atlanta, Orlando, Phoenix, San Francisco-Oakland, San Jose, Washington DC

Nominal Job Growth or Actual Decline: Detroit, Los Angeles, Miami, Riverside-San Bernardino, Sacramento, San Diego

The data is as of April 2008 (released by the BLS in June). The sources and methodology can be found in the free sample report which can be downloaded from our website here.